The Information Content of Pension Fund Asset Reversion

Prior studies on the impact of the termination of overfunded defined benefit pension plans on shareholders' wealth have produced conflicting findings. The first study on the stock market reaction to pension plan termination was conducted by Alderson and Chen (1986); this study claimed that shareholders realize significant positive abnormal returns around the termination announcement date. A more recent study, by Moore and Pruitt (1990), disclaimed the findings of Alderson and Chen. Reexamination of these two studies with additional evidence and the use of the appropriate announcement date suggests that termination of pension plans is associated with significant wealth gain to shareholders. This study also analyzes samples from periods prior to and after the imposition in 1986 of a 10 percent excise tax on recaptured excess pension assets. The empirical results suggest that shareholders experience significant positive wealth effects for the pre-tax (1980-85) period and no wealth effects for the post-tax (1986-88) period. The primary purpose of this study is to determine the impact of stock market reaction upon shareholders' wealth under the partial anticipation hypothesis. The pre-tax sample is analyzed by isolating the expected terminators using the multiple discriminant analysis model. This study finds significant positive abnormal returns only for firms that are not anticipated by the investors as potential terminators. The results of this study do not lend support to either the "separation" or the "integration" hypothesis as proposed by Alderson and Chen (1986). Instead, the results are consistent with the information hypothesis that the market reacts to unanticipated events that provide new information. Cross-sectional regression analysis of unexpected terminators suggests that the abnormal performance of stocks of pension terminating firms is explained by the firms' debt ratio and the amount of surplus pension assets. It can be inferred that firms may resort to recapturing excess pension assets as a way of financing investments internally when faced with unfavorable credit markets